Exports and Freight: Can We Claim ITC on Them as We Do Not Charge GST?

Introduction

Exports are a crucial component of India’s economy, and the Goods and Services Tax (GST) regime has been designed to facilitate their seamless functioning. One of the key concerns for exporters is whether they can claim Input Tax Credit (ITC) on freight expenses incurred in relation to exports, especially considering that exports are zero-rated supplies under GST.

This article examines the treatment of ITC on freight under GST, the eligibility for claiming ITC, the legal provisions governing this aspect, and recent updates in this regard.

Understanding Zero-Rated Supplies and ITC

1. Zero-Rated Supplies and ITC Under GST

As per Section 16(1) of the IGST Act, 2017, exports of goods and services are considered zero-rated supplies. This means that:

1. No GST is levied on the export of goods/services.
2. ITC is available on inputs, input services, and capital goods used for such exports.

This provision ensures that exporters are not burdened with indirect taxes, allowing them to compete effectively in international markets.

2. Freight Charges in Exports

Freight is a critical component of export transactions. Typically, it may be incurred in two ways:

• By the exporter: If the exporter arranges for the transportation of goods, they bear the freight cost and contract with a transporter.
• By the importer: If the contract terms are Free on Board (FOB), the overseas buyer is responsible for the freight.

The key question that arises here is: Can ITC be claimed on freight paid by the exporter, considering that exports do not attract GST?

GST on Freight for Exports: Legal Provisions and ITC Eligibility

1. GST on Freight Paid to a GTA (Goods Transport Agency)

When an exporter hires a Goods Transport Agency (GTA) for the transportation of goods to the port or directly to the foreign buyer, the applicability of GST depends on the following factors:

• GTA under Forward Charge: If the GTA opts for the forward charge mechanism, it will charge 12% GST with ITC eligibility or 5% GST without ITC eligibility. The exporter can claim ITC if GST is charged at 12%.
• GTA under Reverse Charge Mechanism (RCM): If the GTA does not opt for forward charge, the exporter (recipient of service) has to pay GST at 5% under RCM (as per Notification No. 13/2017 – Central Tax (Rate)). Since RCM tax payment is eligible for ITC (subject to conditions), the exporter can claim ITC on this.

2. Freight Paid to Shipping Lines or Airlines

• Freight paid to an Indian Shipping Line or Airline: When an exporter pays freight charges to an Indian shipping company or airline, the service provider will charge GST at 18% on transportation of goods. This GST is available as ITC to the exporter.
• Freight paid to a Foreign Shipping Line: If the exporter hires a foreign shipping company, no GST is charged in India unless the recipient is liable under RCM. However, ITC is not available in such cases.

3. ITC on Freight Paid in CIF vs. FOB Contracts

• CIF (Cost, Insurance, and Freight) Contracts: Under CIF contracts, the exporter arranges and pays for freight. Since this is directly related to exports, ITC can be claimed on GST paid on freight.
• FOB (Free on Board) Contracts: Under FOB terms, the overseas buyer is responsible for freight. Since the exporter does not bear the freight cost, there is no ITC availability.

How to Claim ITC on Export-Related Freight?

To claim ITC on freight, exporters must ensure:

1. GST Invoice from the Transporter: The supplier (shipping line, airline, or GTA) must issue a proper invoice reflecting GST.
2. Payment of Tax under RCM (if applicable): If GST is paid under RCM, it must be deposited before claiming ITC.
3. Matching in GSTR-2B: The ITC claim should reflect in GSTR-2B (except for RCM payments, which need manual entry).
4. Proper Documentation: Export invoices, shipping bills, and tax invoices should be maintained to support ITC claims.

Refund of ITC on Freight for Exporters

Since exports are zero-rated, ITC accumulated on input services such as freight can be claimed as a refund under Rule 89(4) of the CGST Rules, 2017 through:

1. LUT/Bond Mechanism: If the exporter supplies goods without payment of tax under an LUT (Letter of Undertaking), they can claim a refund of unutilized ITC, including GST paid on freight.
2. Payment of IGST: If exports are made on payment of IGST, the refund is available on the IGST amount paid. However, ITC refund is not required separately in this case.

The refund formula for unutilized ITC is:

where:

• Net ITC = ITC availed on inputs and input services (including freight).
• Adjusted Total Turnover = Sum of turnover of zero-rated, exempt, and taxable supplies.

Challenges and Common Issues in Claiming ITC on Freight

1. Non-availability of GST Invoice: Many foreign shipping lines do not issue a GST invoice, making ITC claims difficult.
2. Incorrect GST Charge by Supplier: Some freight service providers apply the wrong GST rate, leading to ITC mismatches.
3. Delay in ITC Refund Processing: Exporters often face delays in processing ITC refund claims, affecting cash flow.
4. RCM Compliance Issues: Many exporters fail to deposit GST under RCM, leading to ITC denial by authorities.

Recent Updates and Clarifications

1. Exemption for Ocean Freight on Imports Removed: The earlier exemption on ocean freight for imports under Notification No. 10/2017-Integrated Tax (Rate) was withdrawn, leading to ITC eligibility for importers but no impact on exporters.
2. Strengthened ITC Matching Mechanism: The GST authorities have tightened ITC reconciliation in GSTR-2B, requiring exporters to ensure that their freight ITC claims align with vendor filings.
3. Refund Processing Through Automated Systems: The government is working on an automated refund mechanism to reduce delays in ITC refund processing for exporters.

Conclusion

Exporters can claim ITC on freight expenses, provided GST is paid and proper documentation is maintained. ITC is available on GST paid to GTA, shipping lines, or airlines under the forward charge mechanism, and under RCM when applicable. Furthermore, unutilized ITC can be refunded under Rule 89(4) of the CGST Rules, making it critical for exporters to maintain compliance with GST reporting and invoicing norms.

Proper understanding of freight-related ITC rules helps exporters optimize costs and enhance profitability in a globally competitive market.